Case Summary: Founder Dispute Over Stock Sale

A Fenwick team led by Jay Pomerantz recently obtained a significant litigation victory for our clients, who were named as defendants in a lawsuit related to a dispute among founders of two private tech companies operating in the U.S. and China. This action was pending in California state court in Santa Clara county, which is in the heart of Silicon Valley. The plaintiff in this action, who was one of the co-founders, sold all of his stock in these two companies to another co-founder in the middle of the global recession. He brought suit against both companies as well as the other two co-founders. In this action, the plaintiff alleged that he should have received substantially more money when he sold his stock. He brought several causes of action against the defendants based principally on alleged fraud and breaches of fiduciary duty by the other two co-founders in connection with this sale.

At the end of 2018, the Court in this action issued an order granting complete victory to our clients. More specifically, the Court granted defendants’ motion for summary judgment and directed that judgment be entered in defendants’ favor on all of plaintiffs’ claims. (Summary judgment is available where a party can establish that there is no dispute of material fact regarding the legal issues in the lawsuit.) In this order, the Court ruled that all of the plaintiff’s claims were barred by two general releases he signed, in which he waived all of his rights to bring any of the claims asserted in the action. The Court also ruled that the applicable statutes of limitations had expired before the lawsuit was filed, which was a further bar to the claims. Finally, the Court ruled that the plaintiff failed to establish that the defendants owed him any fiduciary duties in connection with the stock sale. As result of this order, the plaintiff will receive nothing based on his alleged claims.

This case is important because it involves a scenario that is fairly common: a co-founder or some other investor in a private company sells his stock to a corporate insider or back to the company at a time when the company is facing difficulties. But once the company achieves success and its valuation is greater, the seller sues, claiming that he should have been paid much more for his stock. To help ensure that a private company and its directors and officers are protected against these types of lawsuits, it is critical that any stock sale agreement contain:

• a broad general release and related provisions, such as a waiver of both known and unknown claims and a covenant not to sue;
• an attorneys’ fee provision in the event that a suit is ever brought by the seller;
• depending on the circumstances, an arbitration or forum selection provision; and
• provisions in which the parties represent that, before signing the agreement, they reviewed and understood the agreement and were advised by and consulted with counsel regarding the agreement.

In our case, one of the agreements at issue had an attorneys’ fee provision. Pursuant to this provision, we are currently seeking an order from the Court that would require the plaintiff to pay the attorneys’ fees that were incurred by our clients in this action.

Originally posted on WeChat